KURODA (Kyodo) -- Bank of Japan Governor Haruhiko Kuroda said Wednesday that monetary easing "certainly" must be maintained to achieve its 2 percent inflation target stably and sustainably.
Speaking at an event, Kuroda said Japan's inflation rate has been rising, driven largely by higher import costs. However, such inflation will not continue, Kuroda said, adding that robust wage growth is needed.
Kuroda said the BOJ is closely watching the impact of foreign exchange movements on the economy, noting that "rapid, unidirectional" fluctuations are bad for the economy.
Ideas:
The Bank of Japan strategy is the complete opposite of what the US and the EU is doing related to the key interest rate. As noted in other articles the inflation rate is partly because of the weak yen and partly regular inflation.
If the yen wasn't as weak as it is of course inflation might not be as bad in Japan and maybe the BOJ might not need to worry too much about inflation as the inflation situation doesn't seem to be as bad as the US and the EU.
"Rapid unidirectional" fluctuations in this situation might mean the sudden and unexpected increases in the yen compared to what other currencies are doing.
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"We have not yet achieved the 2 percent price stability target in a stable and sustainable manner. So certainly we will have to continue our monetary easing until we achieve the 2 percent target in a sustainable and stable manner," Kuroda told the event, hosted by the Institute of International Finance.
The BOJ's dovish policy stance contrasts sharply with its U.S. and European peers, which have been raising rates to rein in soaring inflation. The prospect of aggressive rate hikes, however, has raised recession fears.
The governor said monetary easing is needed to support the Japanese economy, recovering from the fallout of the COVID-19 pandemic. The situation in Japan is different from those in Europe or the United States, where the pace of rising prices has been relatively slower. The inflation rate will stably increase toward 2 percent in the coming years, though caution is warranted, he said.
Ideas:
The BOJ goal was always a 2 percent inflation rate related to consumer demand and consumer spending and not producer inflation, which is what the inflation situation in Japan is now.
Increasing the key rate, as an example in the US, South Korea, and the EU has only increased inflation, interest rates, increased rates on loans and so on.
Because most consumers and workers have not had a real wage increase in many years, if the key rate were to increase, the current wages of most workers would not even be close to the inflation rate which might cause a lot of undo stress in the Japanese economy.
A 2 percent increase in inflation related mostly to import and producer prices might not seem like much because what is happening in other countries such as South Korea where the inflation rate is over 5 percent, but even at 2 percent it might be too much for the lower income groups and fixed income groups that use a large part of their income on daily necessities.
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You cannot simply jump to the conclusion that we will be able to achieve 2 percent inflation in two years' time or one-year time so that we can change monetary policy now. That is not correct," Kuroda said.
His remarks came after Japan intervened in the foreign exchange market last month when the yen slipped to 145.90. On Wednesday, the dollar continued its advance, trading close to 147.
Caution about another round of intervention has persisted in the market after the previous one, which Kuroda described as "quite appropriate."
Ideas:
The BOJ might still be thinking that consumer demand consumer spending will increase the normal inflation rate to 2 percent.
But Kuroda does say it's going to take time and might not happen in one year or even two years.
The key, as Kuroda and the BOJ keeps emphasizing is wage increases which right now might not happen anytime soon, even though Japan's largest trade group wants to see a 5 percent increase in wages in the coming fiscal year.
Even if the BOJ does intervene in the currency market again doesn't mean they can slow down the yen from weakening.
The US recently has said they are going to slow down their rate increases which might help the Japanese yen from becoming even weaker.
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Finance chiefs from the Group of 20 economies are gathering in Washington to discuss the global economy's challenges as Russia's war against Ukraine drags on, and the dollar has been broadly gaining strength.
"Probably, in Washington D.C. this time, a lot of emerging economies will complain about the almost universal dollar appreciation against almost all currencies, in particular emerging currencies," Kuroda said.
Ideas:
As mentioned above, Other countries, especially emerging economies are feeling the negative effects of the strong US dollar and the US might be beginning to listen in that a very strong dollar might help some in the US but its a strong negative for most economies around the world and the US seems to have responded by saying its going to dial back its rate increases in the future.
But the key is how long will it take for the yen or any other currency to get back to some kind of normalcy once the US begins to dial back its rate or even slow down the rate increases.
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"And that may have made them address or adopt somewhat higher monetary policy rates than they think quite appropriate from a domestic economic point of view," he added.
A strong dollar can help the United States curb inflation but raises concern about capital outflows from emerging economies.
Ideas:
Just how a stronger rate and a strong dollar helps with inflation is still debatable because of how long its taking for inflation to decrease in the US.
A strong dollar compared to a weak yen is certainly not the best for the Japanese domestic economy but of course is still helps Japanese exporters with higher sales and profits in the US market.
And then there is the possibility of capital outflows from other countries heading to the US where they can get a higher rate on their investments.
But at the same time, it might not be good for the overall global economy and especially emerging economies that might depend on capital investments to improve their economies in the future.
Have a nice day and be safe!
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